Uganda's commercial banks seem to be laying down new strategies as the industry anticipates to record subdued earnings in 2016 owed to low private sector credit and declining yields from government securities amidst easing of monetary policy.
Available data show that the Bank of Uganda (BoU) lowered the central bank rate from 11.5% in February to 9.5% in December, 2017, the lowest ever since the Central Bank embraced the inflation targeting regime four years ago, to tame inflation and stimulate economic activities.
As a result, interest rates dropped from an average of 24 % to 18.9% but the private sector shied away from borrowing - the main source of revenue for banks and other financial institutions.
Instead, the industry's non-performing loans hit a record high of 7.2% as at the end of September 30, up from 6.2% as at the end of June 30, according to Bank of Uganda statistics.
Justine Bagyenda, the executive director at the BoU told The Independent during the release of this month's monetary policy on Dec.18 that they acknowledge the challenge facing the industry saying credit risk has been a major highlight in banking in 2017 as evidenced with the surge in Non-Performing Loans.
"I am (therefore) not going to say that the bank's profitability is going to be better this year compared to last year because as you can see, the credit risk drives down profitability for the banks," she said, adding, " I don't want to speculate on general performance for 2017 until we get the numbers of the entire year."
But industry analysts say 2017 has been generally a bad year characterised with decline in private sector credit and yields from government securities, all of which contribute immensely to the profitability of banks.
"... we see margin compression on bank incomes resulting from falling interest rates on both government securities and lending rates. Only well diversified banks with a competitive advantage will post good results," said Oscar Paul Emasu, a research analyst and operations at the Crested Capital brokerage firm.
"Generally, compared to 2016 when there was a general downturn in business activity, 2017 was expected to be a transition to recovery. We remain optimistic that the business activity will see a rebound in the next year (2018)."
Nevertheless, the industry is bracing for a more aggressive reporting standard (IFRS 9) which will require banks to take a more forward-looking approach to loan loss provisioning, Emasu said, adding that again this will add more pressure on the sector's profitability if they don't realign their credit policies.
Salima Nakiboneka, a financial analyst at the South African-based firm, Stanlib, shares similar views with those of Emasu, saying a decline in private sector credit will affect the bank's profitability this year. The banks will release their annual financial performance for this year starting March 2018.
BoU data shows that average annual credit growth between June and August was 5.8 %, down from 6.1 % posted during March to May, reflecting a slowdown in lending as private sector shy away from loans citing reduced demand for goods and services.
Banks performance in the H1 of 2017
Listed commercial banks in Uganda, with the exception of Dfcu, registered a decline in their profits for the half year of this year signalling a likely decline in the industry profitability.
Stanbic Bank, the country's largest commercial bank by assets, for instance, recorded a reduction in net profit from Shs107bn in 2016 to Shs 95bn bn this year, representing 11% drop.
Bank of Baroda, reported a 33.21% decline in profitability to Shs 16.70bn compared to Shs24.98bn in the same period a year earlier as total incomes slowed by 0.33% to Shs 83.17bn. The Bank's Non-performing loans (NPLs) spiked 363.18% to Shs 73.89Bn compared with Shs 15.95Bn in 2016.
The bank's NPL to loans ratio of 14.37% compared to just 2.81% in the same period the previous year was much higher than that of the listed peers Dfcu which had an NPL ratio of 5.5% while Stanbic's is at 3.97%.
On other hand, Dfcu saw its net profit more than quadruple to Shs114.05bn during the six months ending June 30 compared to Shs23.3bn recorded last year following acquisition of part of Crane Bank assets in January this year.
Uganda's banking industry's net profit dropped from Shs541 billion in December 2015 to Shs302 billion in December 2016, according to BoU Annual Supervisory Report 2017.
Similarly, return on assets for the industry declined from 2.6% in 2015 to 1.3% in 2016; return on equity almost declined by 100% from 16% to 8.3% during the same period under review.
Non-performing loans (NPLs) to total gross loans rose from 5.3% to 10.5% in the period between December 2015 and December 2016; this led to a slowdown in private sector credit growth and a drop in bank profitability.
The capital ratios of banks to risk weighted assets fell from 18.6% at the end of 2015 to 17.3% at the end of 2016, although the latter was still above the regulatory minimum of 8%. This partly led to the takeover of two banks - Crane Bank, one of the top three out of the 25 and a middle sized bank, Imperial Bank Uganda Limited - by the central bank and later sold to DFCU bank Limited and Exim Bank Uganda Limited respectively.
Banks laying down new strategies
But Mathias Katamba, the managing director at Housing Finance Bank told The Independent that despite the prevailing conditions in the country's banking industry, banks are already laying down new strategies on how to perform better in 2018.
"Banks are already strategies on how to perform well in 2018," he said, adding that the measures are on how to leverage on technology as well as re-adjust to the new financial reporting standards to grow their revenues.